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Sunday, March 20, 2005

East Asia Needs $1 Trillion for Infrastructure Over Next Five Years

Source: The World Bank

TOKYO, March 16, 2005 - Developing countries in East Asia need to spend more than a trillion dollars over the next five years in roads, water, communications, power, and other infrastructure to cope with rapidly expanding cities, increasing populations, and the growing demands of the private sector, says a new study released here today by the Asian Development Bank (ADB), Japan Bank for International Cooperation (JBIC), and the World Bank.

Government and private investment in infrastructure has been vital to growth in East Asia, providing the regional and international links for trade, and connecting rural and urban areas to help share the benefits of rapid growth. After the economic crisis of the late 1990s, private investment in infrastructure dropped off for countries like Indonesia and the Philippines, resulting in a serious infrastructure gap after years of little or no investment. Poorer countries in the region like Lao PDR and Cambodia continue to attract little or no private infrastructure funds.Now, developing countries in East Asia[1] face a massive infrastructure funding challenge. The study estimates that the 21 countries covered will need more than US$200 billion per year to fund new investment and maintenance of power and piped gas, transport, information and communications technology, and water and sanitation systems. China is expected to require 80 percent of the total investment. A more active citizenry across the region is also demanding better services, including rural roads and bridges to access markets, and clean water and sanitation services.

Connecting East Asia: A New Framework for Infrastructure, the first joint study by ADB, JBIC, and the World Bank, notes that companies investing in infrastructure, both inside and outside of the region, say they are keen to invest where government policies and regulations are predictable. The study is based on extensive regional consultations with government officials, private investors, NGOs, academics and development partners. In addition, in-depth interviews with officials from 48 companies from both inside and outside of the region were conducted to gauge the level of interest in infrastructure investment and to identify what criteria companies use when deciding where to invest. Among the constraints to investment, the companies cited the lack of enforcement of contracts, inconsistencies in regulations and in the courts, and corruption.

Governments clearly have significant incentives for improving their investment climates and making sure that reliable public policies are in place to attract the right kind of investment, said ADB Vice President Geert van der Linden. In the past, infrastructure has been a key driver of economic growth and for reducing poverty. Getting the policies right is clearly going to be a priority for countries in the region to attract the private funds needed to promote economic growth and to share the benefits of that growth with poorer groups.

This is particularly important as the region is increasingly interconnected through supply chain production networks and expanding cross-border trade.

"In order to continue the growth trend, East Asian countries must keep up with the demands of companies which need energy, reliable logisticslinks, and other serviceas part of investment climates, said JBIC Governor Kyosuke Shinozawa. Basic infrastructure service, such as water and sanitation as well as transportation services, for people particularly for the poor, needs to be provided for achieving Millennium Development Goals.

Although the private sector will provide a portion of the financing, and public-private partnerships will also be critical, the public sector itself also has an important role to play where private financing is insufficient, unavailable, or too expensive, particularly in the smaller countries. The emphasis must be on selecting the right investments and putting in place the right institutional and policy structures to make them worthwhile.

Recently, infrastructure provision through development aid has been reaffirmed as concept covering not only construction of physical infrastructure facilities, but also service provision through the facilities, said Kiyoto Ido, Director-General, International Bureau, Ministry of Finance, Japan. In IDA 14 Replenishment meetings, the Japanese government strongly insisted that economic growth is a prerequisite for poverty reduction and that infrastructure provides a basis for expanding opportunities for economic growth and poverty reduction. Consequently, IDA 14 Deputies' Report states the necessity of significant increase of spending for assisting infrastructure provision.

The three institutions supporting this study intend to play a major role in supporting its findings and in helping countries meet their growing infrastructure and institutional needs.

Over the course of our consultations, people we talked with emphasized the long-term nature of infrastructure development, a process which requires dedicated and reliable partners, said Jemal-ud-din Kassum, the World Bank's Regional Vice President for East Asia and Pacific. Although official lenders and donorsprovide a small fraction of the financing in this sectorcompared to government's own budget and private investment, usually for more complex projects or new approaches, the organizations responsible for this study are contemplatingstepping up our engagement, both in terms of the funds we provide and the scope of the projects we support. It is critical that we seize this opportunity to contribute to the region's ability to reduce poverty, expand opportunities, and share the benefits of future growth.